CALGARY, AB, Dec. 8, 2020 /CNW/ - Whitecap Resources Inc.
("Whitecap" or the "Company") (TSX: WCP) and TORC Oil & Gas
Ltd. ("TORC") (TSX: TOG) are pleased to announce a business
combination (the "Business Combination") of two strong energy
franchises resulting in a well-capitalized, low decline, light oil
weighted company with an attractive free funds flow profile.
Whitecap and TORC have entered into a business combination
agreement (the "Agreement") under which the companies have agreed
to combine their businesses in an at market, all-stock transaction
valued at approximately $900 million,
including TORC's net debt, estimated at $335
million as of December 31,
2020. Under the terms of the Agreement, shareholders of TORC
("TORC Shareholders") will receive 0.57 Whitecap common shares (the
"Whitecap Shares") in exchange for each TORC common share held (the
"TORC Shares"). The at market exchange ratio was determined using
ten-day volume weighted average share prices of the Whitecap Shares
and the TORC Shares on the Toronto Stock Exchange ("TSX") prior to
the signing of the Agreement.
The combined entity will be stewarded by the existing Whitecap
executive team and will continue to advance a total return model
combining modest production growth with meaningful cash dividends.
The Business Combination has been unanimously approved by the
Boards of Directors of both Whitecap and TORC and is expected to
close on or before February 25, 2021,
subject to customary conditions, including the receipt of necessary
regulatory and shareholder approvals.
Strategic and Financial Benefits of the Business
Combination
- Material Size and Scale. Significantly increases
Whitecap's scale and core area dominance as TORC's asset base fits
directly into Whitecap's current core areas creating one of the
largest pure play conventional light oil producers in Canada with over 100,000 boe/d (78% oil and
NGLs) of corporate production. The combined entity will have an
enterprise value of approximately $4
billion and has paid $1.4
billion in cumulative dividends to shareholders since
inception.
- Improved Free Funds Flow Profile. TORC's current
production is approximately 25,000 boe/d and its production in 2021
is expected to average 22,000 boe/d due to a moderated capital
program resulting in a production decline rate of less than 19%.
The lower production profile is designed to enhance the combined
entity's ability to generate significant free funds flow to
increase cash returns to shareholders. The combined entity is
expected to have over $300 million of
free funds flow supported by a base production decline rate of
approximately 17%.
- Enhanced Long-Term Shareholder Returns. Return of
capital to shareholders continues to be a priority for Whitecap and
is an important component of its total return strategy. The
combined entity will be able to generate significantly more free
funds flow which supports a 6% increase to the monthly dividend
from $0.01425 per share to
$0.01508 per share ($0.18096 per share annualized). The dividend
increase is expected to be effective with the March 2021 dividend payable in April 2021. The pro forma 2021 total payout ratio
is expected to be 66% at a crude oil price of US$45/bbl WTI.
- Significant Synergies. Tangible cost savings and
inventory optimization opportunities are expected to result in
incremental free funds flow of approximately $15 million in year one from corporate and
operational synergies in the near term.
- Top Tier Balance Sheet. The combined business will
maintain its strong credit profile and will have ample liquidity to
manage commodity price volatility. Whitecap's credit facilities are
covenant based and are not subject to yearly credit determinations.
The combined business is expected to benefit from approximately
$6 million in lower interest expense
and is expected to reduce net debt by over $200 million in 2021, resulting in a pro forma
debt to EBITDA ratio of 1.8x at US$45/bbl WTI.
- Sustainable Development. Whitecap remains committed to
best-in-class environment, social and governance ("ESG") practices
and continuously improving its ESG profile. Whitecap is the
operator of the Weyburn Unit, one of the largest carbon capture and
utilization storage projects in the world, currently sequestering
more than 2 million tonnes of CO2 annually and providing
the Company with its net negative emitter status.
- Disciplined Leadership and Governance. The combined
business will continue to be led by the Whitecap executive team and
Board of Directors. Pursuant to the Agreement and subject to
receipt of approval by the shareholders of Whitecap ("Whitecap
Shareholders") of the resolution to amend the articles of Whitecap
(the "Article Amendment Resolution") at the Whitecap Meeting (as
defined below), Whitecap has agreed to appoint a designated
director from TORC to its Board of Directors on closing.
Market Leading Light Oil Player
The strategic business combination of Whitecap and TORC creates
a leading oil weighted producer in Western Canada with a focused asset base
exhibiting lower production declines, high operating netbacks and
strong capital efficiencies.
Grant Fagerheim, Whitecap's
President & CEO, stated: "We are combining two strong Canadian
energy producers to form a leading large-cap, light oil company
geared towards generating sustainable long-term returns for
shareholders while prioritizing responsible Canadian energy
development. Despite the challenging conditions and significant
volatility throughout the year, we have become an even stronger and
more resilient energy producer entering 2021 with the combination
with TORC as well as the NAL transaction announced on August 31, 2020. We would like to thank our
employees for their continued exemplary efforts and our
shareholders for their ongoing support. We look forward to
advancing returns to our shareholders into the future."
There is significant overlap in Whitecap's and TORC's asset
bases providing for meaningful operational synergies and inventory
optimization opportunities. The combined business will have 67% of
its production under waterflood recovery, supporting its industry
leading base production decline rate of 17%.
Brett Herman, TORC's President
& CEO, stated, "On behalf of TORC's management and Board of
Directors, we would like to thank our shareholders for their
ongoing support over the past ten years. We believe our corporate
values are closely aligned with Whitecap's management team and the
announced business combination will create an exceptionally
resilient energy producer that is positioned for growth, while
delivering a sustainable dividend to shareholders. In a market
environment that is increasingly favouring size and scale, a
business combination with Whitecap exposes TORC shareholders to a
larger platform while remaining consistent with our existing
philosophy of balancing growth with financial discipline along with
prudent capital allocation. We are pleased to become
shareholders of Whitecap."
Canada Pension Plan Investment Board ("CPP Investments") has
been a TORC shareholder since 2013 and has entered into a Support
Agreement whereby it will vote in favour of the transaction under
the terms of the agreement.
"As a long-standing investor in TORC, we're pleased to support
this transaction, which has compelling economic merits for both
companies and builds a stronger business of scale that can continue
to participate in industry consolidation. We would also like to
thank TORC's management team and the Board for their work in
building a strong energy franchise," says Michael Koen, Managing Director, Head of
Relationship Investments, CPP Investments.
Preliminary Pro Forma 2021 Outlook
Following the Business Combination, Whitecap remains well
positioned to continue to advance internal development
opportunities and selectively consolidate high-quality assets.
Whitecap's competitive advantages include a strong balance sheet,
high funds flow netback assets, shallow production decline profile
and depth and quality of inventory to support Whitecap's fully
funded model. Whitecap remains committed to growing its business
over the long-term in combination with providing Whitecap
Shareholders with meaningful cash returns.
Whitecap's stand-alone forecasted base case for 2021 (including
the completion of the NAL Transaction, as defined below), is
average production of 81,000 – 83,000 boe/d on capital investments
of $250 - $270
million as press released on October
29, 2020. The pro forma entity is expected to have average
production in 2021 of 99,000 – 101,000 boe/d (assuming a closing
date of February 25, 2021) on capital
investments of $280 to $300 million. Based on this spending and
production profile, Whitecap anticipates generating funds flow of
approximately $602 million with free
funds flow of approximately $312
million and a total payout ratio of 66% based on commodity
prices of US$45/bbl WTI and
C$2.50/GJ AECO. A detailed 2021
budget will be provided on close of the Business Combination.
NAL Update
On August 31, 2020, Whitecap
announced that it had entered into an agreement in an all-stock
transaction valued at approximately $155
million with NAL Resources Limited and a privately held
wholly owned subsidiary of Manulife Financial Corporation (the "NAL
Transaction"). With integration progressing, Whitecap continues to
anticipate the close of the NAL Transaction on January 4, 2021.
Recommendations of the Whitecap and TORC Board of
Directors
The Whitecap Board of Directors has unanimously determined that
the Business Combination and the execution of the Agreement is in
the best interests of Whitecap, that the consideration to be paid
by Whitecap pursuant to the Business Combination is fair, from a
financial point of view, to Whitecap and has unanimously
recommended that the Whitecap Shareholders vote in favour of the
resolution approving the issuance of the Whitecap Shares pursuant
to the Business Combination (the "Issuance Resolution") at the
Whitecap Meeting. National Bank Financial Inc. has provided the
Whitecap Board with a fairness opinion stating that, as of the date
thereof and subject to the assumptions, limitations, and
qualifications set forth therein, the consideration to be paid to
the TORC Shareholders is fair, from a financial point of view, to
Whitecap. All of the directors and officers of Whitecap have
entered into agreements with TORC pursuant to which they have
agreed to vote their Whitecap Shares in favour of the Issuance
Resolution and the Article Amendment Resolution and otherwise
support the Business Combination.
The TORC Board of Directors has unanimously determined that the
Business Combination and the execution of the Agreement is in the
best interests of TORC, that the Business Combination is fair to
TORC Shareholders and has unanimously recommended that the TORC
Shareholders vote in favour of the resolution approving the
Business Combination (the "Business Combination Resolution") at the
TORC Meeting (as defined below). RBC Capital Markets has provided
an opinion to the Board of Directors of TORC that, as of the date
thereof and subject to the assumptions, limitations and
qualifications set forth therein, the consideration to be received
under the Transaction is fair from a financial point of view to the
holders of the TORC Shares. TORC's management team and Board of
Directors ("TORC Insiders") and CPP Investments have all entered
into support agreements with Whitecap and have agreed to vote their
TORC Shares in favour of the Business Combination Resolution and
otherwise support the Business Combination.
Combination Structure Details
Whitecap and TORC have entered into the Agreement to effect the
Business Combination through a plan of arrangement under the
Business Corporations Act (Alberta). Under the terms of the Business
Combination, Whitecap will acquire all of the issued and
outstanding shares of TORC for share consideration. TORC
Shareholders will receive 0.57 Whitecap Shares for each TORC
Share owned. The exchange ratio was determined based on the volume
weighted average trading price of the Whitecap Shares and TORC
Shares on the TSX for the preceding ten trading days prior to the
signing of the Agreement. As part of the Agreement, Whitecap will
assume TORC's net debt of $335
million estimated as at December 31,
2020.
TORC Insiders have agreed to enter into hold period agreements
("Hold Period Agreements") with Whitecap on the completion of the
Business Combination. The Hold Period Agreements will provide that,
subject to certain exceptions, the TORC Insiders will not be
entitled to transfer or otherwise dispose of the Whitecap Shares
they acquire pursuant to the Business Combination for periods of
three (3), six (6) and nine (9) months from the closing date of the
Business Combination; one-third of the Whitecap Shares held by the
TORC Insiders to be released after each period.
The Business Combination requires approval by at least 66⅔% of
the votes cast by TORC Shareholders present in person or
represented by proxy at a special meeting of TORC Shareholders to
be called to consider the Business Combination (the "TORC Meeting")
and a majority of the votes cast by TORC Shareholders after
excluding the votes cast by those persons whose votes may not be
included under Multilateral Instrument 61-101 - Protection of
Minority Security Holders in Special Transactions.
The issuance of the Whitecap Shares pursuant to the Business
Combination requires approval by at least 50% of the votes cast by
Whitecap Shareholders represented in person or by proxy at a
special meeting of Whitecap Shareholders (the "Whitecap Meeting")
to be called to consider the Issuance Resolution, as required by
the rules of the TSX. In addition, Whitecap Shareholders will be
asked to consider the Article Amendment Resolution to increase its
maximum number of directors so that Whitecap can appoint a
designated director from the TORC Board of Directors to the
Whitecap Board of Directors on closing.
The Agreement contemplates that the Whitecap Meeting and TORC
Meeting will be held in February
2021. It is expected that a joint management information
circular will be sent to the shareholders of each of Whitecap and
TORC in January 2021. Closing of the
Business Combination is expected to occur on or before February 25, 2021.
The Agreement provides for non-solicitation covenants on behalf
of TORC which are subject to the fiduciary duty obligations of the
TORC Board and provides Whitecap with the right to match any
superior proposal received by TORC. The Agreement also provides for
mutual non-completion fees of $20 million in the event the
Business Combination is not completed or is terminated by either
party in certain circumstances.
The Agreement provides that completion of the Business
Combination is subject to certain conditions, including the receipt
of all required regulatory approvals, the approval of the TSX, the
approval of the shareholders of Whitecap and TORC (as described
above), the approval of the Court of Queen's Bench of Alberta and approval under the Competition
Act (Canada).
Advisors
National Bank Financial Inc. acted as exclusive financial
advisor to Whitecap. Burnet, Duckworth & Palmer LLP is acting
as Whitecap's legal advisor.
RBC Capital Markets acted as exclusive financial advisor to
TORC. McCarthy Tétrault LLP is acting as TORC's legal advisor.
Conference Call and Webcast
Whitecap has scheduled a conference call and webcast to begin
promptly at 10:00 am MT
(12:00 noon ET) on December 9,
2020.
The conference call dial-in number is:
1-888-390-0605 or (587) 880-2175 or (416) 764-8609
A live webcast of the conference call will be accessible on
Whitecap's website at www.wcap.ca by selecting
"Investors", then "Presentations & Events".
Shortly after the live webcast, an archived version will be
available for approximately 14 days.
Note Regarding Forward-Looking Statements
This press release contains forward-looking statements and
forward-looking information (collectively "forward-looking
information") within the meaning of applicable securities laws
relating to Whitecap and TORC's current expectations, estimates,
projections and assumptions, as applicable, that were made by each
company in light of information available at the time the statement
was made. Forward-looking information typically uses words such as
"anticipate", "believe", "continue", "trend", "sustain", "project",
"expect", "forecast", "budget", "goal", "guidance", "plan",
"objective", "strategy", "target", "intend", "estimate",
"potential", or similar words suggesting future outcomes,
statements that actions, events or conditions "may", "would",
"could" or "will" be taken or occur in the future, including
statements about strategy, plans, focus, objectives, priorities and
position; and the strategic rationale for, and anticipated benefits
to be derived from, the Business Combination. In particular, and
without limiting the generality of the foregoing, this press
release contains forward-looking statements with respect to: TORC's
net debt estimated at $335 million as
of December 31, 2020; Whitecap's
ability continue to advance a total return model combining modest
production growth with meaningful cash dividends; the management
team of the combined entity; that the Business Combination is
expected to close on or before February 25,
2021; average 2021 production, production mix and production
decline rate; the anticipated benefits of the Business Combination,
including: (i) that the Business Combination will create the
largest pure play conventional light oil producer in Canada with an enterprise value of
approximately $4 billion, (ii) that
the Business Combination will result in tangible cost savings and
inventory optimization opportunities the anticipated benefits to be
derived therefrom, (iii) TORC's anticipated 2021 production and
decline rates, (iv) that the combined entity is expected to have
over $300 million of free fund flow;
(v) that the Business Combination will result in a combined entity
that is able to generate significantly more free funds flow and the
anticipated benefits to be derived therefrom, (vi) the ability of
the combined entity to generate significantly more free funds flow
which will support an increase to Whitecap's dividend of 6% and the
timing of the payment, (vii) that the Business Combination will
result in the combined entity having a total payout ratio of 66% at
US$45/bbl WTI, (vii) that the
Business Combination will result in lower interest expense, reduce
net debt and the anticipated benefits therefrom, and (ix) that the
Business Combination will result in lower production declines, high
operating netbacks and strong capital efficiencies; the appointment
of a TORC designee to the Whitecap Board of Directors on closing of
the Business Combination; the execution of the Hold Period
Agreements with TORC Insiders on closing of the Business
Combination and the terms and conditions thereof; the timing of
Whitecap Meeting and TORC Meeting; Whitecap's competitive
advantages include a strong balance sheet, high funds flow netback
assets, shallow production decline rate and depth and quality of
inventory to support Whitecap's fully funded model; timing of
closing of the NAL Transaction; Whitecap's ability to grow its
business for the long-term in combination with providing Whitecap
Shareholders with meaningful cash dividends; 2021 average
production and capital investments of the combined entity; and 2021
funds flow and free funds flow.
The forward-looking information is based on certain key
expectations and assumptions made by each company, as applicable,
including expectations and assumptions concerning prevailing
commodity prices, exchange rates, interest rates, applicable
royalty rates and tax laws; the impact (and the duration thereof)
that the COVID-19 pandemic will have on (i) the demand for crude
oil, NGLs and natural gas, (ii) Whitecap's supply chain, including
its ability to obtain the equipment and services it requires, and
(iii) Whitecap's ability to produce, transport and/or sell its
crude oil, NGLs and natural gas; the ability of OPEC+ nations and
other major producers of crude oil to reduce crude oil production
and thereby arrest and reverse the steep decline in world crude oil
prices; future production rates and estimates of operating costs;
performance of existing and future wells; reserve volumes;
anticipated timing and results of capital expenditures; the success
obtained in drilling new wells; the sufficiency of budgeted capital
expenditures in carrying out planned activities; the timing,
location and extent of future drilling operations; the state of the
economy and the exploration and production business; results of
operations; performance; business prospects and opportunities; the
availability and cost of financing, labour and services; the impact
of increasing competition; ability to efficiently integrate assets
and employees acquired through acquisitions, ability to market oil
and natural gas successfully; access to capital; the timing of the
completion of the Business Combination and receipt of applicable
regulatory approvals and on the terms contemplated; and the closing
of the NAL Transaction on the timing and terms and conditions
currently contemplated.
Although the expectations and assumptions on which such
forward-looking information is based are believed to be reasonable,
undue reliance should not be placed on the forward-looking
information because no assurance can be given that they will prove
to be correct. Since forward-looking information addresses future
events and conditions, by its very nature they involve inherent
risks and uncertainties. These include, but are not limited to: the
risks associated with the oil and gas industry in general such as
operational risks in development, exploration and production;
pandemics and epidemics; delays or changes in plans with respect to
exploration or development projects or capital expenditures; the
uncertainty of estimates and projections relating to reserves,
production, costs and expenses; health, safety and environmental
risks; commodity price and exchange rate fluctuations; interest
rate fluctuations; marketing and transportation; loss of markets;
environmental risks; competition; incorrect assessment of the value
of acquisitions; failure to complete or realize the anticipated
benefits of acquisitions or dispositions; ability to access
sufficient capital from internal and external sources; failure to
obtain required regulatory and other approvals; reliance on third
parties and pipeline systems; and changes in legislation, including
but not limited to tax laws, production curtailment, royalties and
environmental regulations. Actual results, performance or
achievement could differ materially from those expressed in, or
implied by, the forward-looking information and, accordingly, no
assurance can be given that any of the events anticipated by the
forward-looking information will transpire or occur, or if any of
them do so, what benefits that we will derive therefrom. The above
summary of assumptions and risks related to forward-looking
information has been included in this press release in order to
provide security holders with a more complete perspective on future
operations and such information may not be appropriate for other
purposes.
Unless specifically indicated, all forward-looking information
with respect to the combined entity assumes the completion of the
NAL Transaction on the terms and conditions previously publicly
announced by Whitecap.
Readers are cautioned that the foregoing lists of factors are
not exhaustive. Additional information on these and other factors
that could affect our operations or financial results are included
in reports on file with applicable securities regulatory
authorities and may be accessed through the SEDAR website
(www.sedar.com).
These forward-looking statements are made as of the date of this
press release and we disclaim any intent or obligation to update
publicly any forward-looking information, whether as a result of
new information, future events or results or otherwise, other than
as required by applicable securities laws.
This press release contains future-oriented financial
information and financial outlook information (collectively,
"FOFI") about Whitecap's pro forma expected incremental funds flow,
dividends, free funds flow, total payout ratio, lower interest
expense, reduction in debt, debt to EBITDA, capital investments,
funds flow and free funds flow, all of which are subject to the
same assumptions, risk factors, limitations, and qualifications as
set forth in the above paragraphs. The actual results of operations
of Whitecap and the resulting financial results will likely vary
from the amounts set forth in this presentation and such variation
may be material. Whitecap and its management believe that the FOFI
has been prepared on a reasonable basis, reflecting management's
best estimates and judgments. However, because this information is
subjective and subject to numerous risks, it should not be relied
on as necessarily indicative of future results. Except as required
by applicable securities laws, Whitecap undertakes no obligation to
update such FOFI. FOFI contained in this press release was made as
of the date of this press release and was provided for the purpose
of providing further information about Whitecap's anticipated
future business operations. Readers are cautioned that the FOFI
contained in this press release should not be used for purposes
other than for which it is disclosed herein.
Oil and Gas Advisories
"Boe" means barrel of oil equivalent based on 6 mcf of natural
gas to 1 bbl of oil. Boe may be misleading, particularly if used in
isolation. A boe conversion ratio of 6:1 is based on an energy
equivalency conversion method primarily applicable at the burner
tip and does not represent a value equivalency at the wellhead. In
addition, given that the value ratio based on the current price of
crude oil as compared to natural gas is significantly different
from the energy equivalency of 6:1, utilizing a conversion on a 6:1
basis may be misleading as an indication of value.
Production
References to crude oil or natural gas production in this press
release refer to the light and medium crude oil and conventional
natural gas, respectively, product types as defined in National
Instrument 51-101, Standards of Disclosure for Oil and Gas
Activities.
Disclosure of production on a per boe basis in this press
release consists of the constituent product types and their
respective quantities as disclosed in the following table:
|
Crude oil
(bbls/d)
|
NGLs
(bbls/d)
|
Natural
gas
(Mcf/d)
|
Total
(boe/d)
|
TORC
Current
|
21,382
|
912
|
16,233
|
25,000
|
TORC 2021
Standalone
|
18,816
|
803
|
14,285
|
22,000
|
Whitecap 2021
Standalone (1)
|
53,250 –
54,798
|
8,203 –
8,334
|
117,282 –
119,208
|
81,000 –
83,000
|
Whitecap 2021
Proforma
|
68,645 –
70,193
|
8,860 –
8,991
|
128,970 –
130,896
|
99,000 –
101,000
|
Note:
|
|
(1)
Includes NAL Transaction
|
Non-GAAP Measures
This press release includes non-GAAP measures as further
described herein. These non-GAAP measures do not have a
standardized meaning prescribed by International Financial
Reporting Standards ("IFRS" or, alternatively, "GAAP") and,
therefore, may not be comparable with the calculation of similar
measures by other companies.
"Enterprise value" is calculated as market
capitalization plus net debt. Management believes that enterprise
value provides a useful measure of the market value of Whitecap's
debt and equity.
"Free funds flow" represents funds flow less
expenditures on property, plant and equipment ("PP&E").
Management believes that free funds flow provides a useful measure
of Whitecap's ability to increase returns to shareholders and to
grow the Company's business. Previously, Whitecap also deducted
dividends paid or declared in the calculation of free funds flow.
The Company believes the change in presentation better allows
comparison with both dividend paying and non-dividend paying
peers.
"Market capitalization" is calculated as period end
share price multiplied by the number of shares outstanding at the
end of the period. Management believes that market capitalization
provides a useful measure of the market value of Whitecap's
equity.
"Total payout ratio" is calculated as dividends paid
or declared plus expenditures on PP&E, divided by funds flow.
Management believes that total payout ratio provides a useful
measure of Whitecap's capital reinvestment and dividend policy, as
a percentage of the amount of funds flow.
SOURCE Whitecap Resources Inc.